Overloaded With Employer Stock? Diversification Strategies for Big Tech Employees at Meta, NVIDIA, and Microsoft

*This post pertains specifically to “Magnificent 7” employees, and especially employees of Meta, MSFT, and NVIDIA. The concepts within, however, can apply to any employee who receives large amounts of equity compensation*

Since the early days of the tech boom, it has been commonplace for employees to receive most of their compensation not as cash, but as some sort of reward tied to company performance.  This “equity compensation” is designed to help retain employees through use of multi-year vesting periods and allows them to participate in corporate profits and losses. 

Common Types of Equity Compensation

A few examples and brief explanations of different types of equity compensation can be found below:

• Restricted Stock Units (RSUs): These are shares that are given to an employee as compensation.  Most RSUs “vest” over a period of years.  Prior to vesting, an employee cannot sell their stock and they risk losing their stock entirely if they quit working with the employer.
• Stock Options:  Options allow employees to purchase shares of employer stock at a prespecified “strike price.”  If a stock has strong performance and is well above the “strike,” an employee can purchase shares for far below market price.  Stock options are either offered as tax-advantaged “Incentive Stock Options (ISOs)” or “Non-Qualified Stock Options (NSOs).”
• Phantom Stock/Stock Appreciation Rights (SARs): Employees with these do not own shares in their employer but will receive payouts based on company performance.  These are most typical with private companies that are not listed on major stock exchanges.

When Your Stock Triples – The Problem Unique to Mag 7 Employees

The hope for most is that their stock appreciates, but too much appreciation can magnify a unique risk – concentration.  Concentration occurs when the value of a single stock in one’s portfolio grows too large and leaves a portfolio under-diversified.  And, as the value of employer stock grows, company performance can increasingly steer an entire investment portfolio.

Naturally, a large position in employer stock is good if the company is performing well, but trees don’t grow to the sky, and profits are often cyclical.  Concentration risk in employer stock is even more of a potential issue when considering that both one’s income as well as investments can be driven by their employer’s performance.  In other words, a downturn in an employer’s profits can not only lead to concentrated investment losses, but also potential job loss.

Selling Stock Upon Vesting

A popular solution to combat the “under-diversification” that often comes with equity compensation is to sell stocks and exercise upon vesting or upon options becoming “in the money.”  This allows funds to be freed to diversify into other investments.  Still, many employees find themselves with large unvested employer stock positions that are not eligible for sales.  Large unvested stock positions require careful investment planning, which is discussed at the end of this post.  However, selling employer stock upon vesting is a good starting point to enhance diversification and reduce concentration risk.

What About Taxes?

Of course, there are several considerations to such a strategy.  Taxes are especially an issue when it comes to options, as option exercise may be considered a taxable event.  Similarly, there may be a holding period requirement for both RSUs and options for sales to qualify for preferential long-term capital gains treatment.

What to Buy With Sale Proceeds?

Many individuals will take sale proceeds from an employer stock sale and simply invest them in an S&P 500 index fund.  This may not be the best option, especially for “Mag 7” tech employees, as most S&P 500 index funds have big weights towards the same big cap tech stocks an employee was looking to diversify out of.  As of August 2025, the Mag 7 accounts for 34.5% of the holdings of the S&P 500, and these mega-cap tech stocks are highly correlated with each other, as highlighted in the correlation matrix below:

These correlations suggest that simple indexing strategies, or even a strategy that simply avoids buying more of only an employer stock likely offers less diversification than one would hope to achieve.

Direct Indexing?

“Direct Indexing” has been an increasingly recommended tool for creating diversified portfolios that take into account an individual’s unique constraints.  This approach “reconstructs” and index using individual holdings, adding weightings and omitting stocks based on unique constraints.  As time goes by, a direct indexing strategy will “tax loss harvest” by selling losing stocks to potentially offset gains among others while trying to maintain an allocation to the benchmark index.

Direct indexing is advertised as a custom-tailored tool that saves money on taxes and delivers superior tax-adjusted returns.  We disagree and think the strategy falls short on several counts.  First, it’s more expensive to implement a direct indexing strategy.  There are explicit management fees as well as implicit costs of buying and selling individual stocks (specifically, costs associated with bid-ask spreads).  Customizations beyond single stock or sector exclusions may also be limited depending on provider.

More importantly than fees is what often happens to directly indexed portfolios over the long term.  At first, the portfolio is new, and there are usually plenty of losses to harvest.  These losing positions are gradually reduced while gains are allowed to ride.  This generates tax savings in early years.  Over the long run, however, a directly indexed portfolio eventually becomes a, in our opinion, mess of highly appreciated positions that push a portfolio’s allocation far beyond that of a target index.  It’s a short-term “shiny object,” in our opinion, but leads to a skewed portfolio that is “stuck” paying increased management fees over the long term.

A Wholistic Approach Looking For Portfolio Gaps & Considering Objectives

We suggest a comprehensive analysis of a Mag 7 employee’s entire portfolio to calculate their own concentration risk as well as to identify any other gaps in one’s portfolio.  On a sector basis, most equity compensated tech employees have an overweight towards the technology sector.  That’s unsurprising.  These employees tend to also be overallocated to “growth” stocks, which may be more sensitive to economic downturns compared to stocks that are in “value” sectors (utilities, consumer staples, financials, industrials).  Even within the technology sector, there are stocks that have value characteristics (e.g. Cisco, IBM, Qualcomm) that a Mag 7 employee can diversify with.

Other gaps to consider may be an overallocation to domestic stocks versus international as well as an overallocation to stocks overall relative to one’s risk tolerance.  At WELLth, we prefer to use tax-advantaged accounts such as 401ks and IRAs, rather than other taxable funds, to add ballast to a concentrated employer stock position.  These accounts incur no taxes upon trading and can be adjusted on an ongoing basis without additional expenses or taxes.

Conclusion

Equity compensated employees face unique challenges relating to diversifying their portfolios.  Vesting periods, tax constraints, and fluctuating employer stock performance quite often require a customized and regularly adjusted portfolio in order to minimize under-diversification risk.  WELLth creates these strategies in a tax and cost-efficient manner, giving Mag 7 employees peace of mind knowing that a bout of bad company performance won’t lead to personal tragedy.  Clients can also be confident that their investments are managed within the context of a larger financial plan designed to minimize taxes, maximize wealth, and help clients create their best lives.

If you’d like to learn more, we invite you to schedule a complimentary phone consultation with us today.  You can schedule a time that works for you by clicking here.